7 billion reasons markets will change direction

Commentary: Five trends for investors to watch as population grows

By

MatthewLynn

LONDON (MarketWatch) — The markets may be full of their usual noise — another twist to the Greek tragedy, poor growth figures, a central bank somewhere printing some more money — but sometimes it is worth raising your eyes above all the day-to-day chatter and concentrating on the really important things that are happening in the world.

When the history books get written, 2011 won’t be remembered particularly for the overthrow of Col. Gadhafi in Libya, nor for the endless wrangling over the future of the euro, or even for the United States losing its triple-A rating, even though all of those events may manage to merit a footnote.

7 billionth person born in Philippines

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Hospital workers and family welcome a newborn in the Philippines as the world population reaches 7 billion. (Video, photo: Reuters)

By far the more significant thing to happen in 2011 was the world’s population smashing through the 7 billion barrier — as it did on Monday, according to United Nations calculations.

The world’s population is exploding. How is that likely to impact on the global economy and markets in the next two decades? The West will decline in importance, Africa will rise in significance, commodities will get steadily more expensive, and the world will become more mobile. Despite all that, growth will resume, even if there will be some terrifying bumps along the way.

The world’s population has been on a steep upward trend ever since the industrial revolution taught us how to support more and more people on a planet that doesn’t get any bigger.

It took us from the beginning of time until 1922 to get up to 2 billion people, but these days we add the odd billion to the total faster than the Greeks run up their national debt. We went over 6 billion in 1999, so it has only taken 12 years to add the latest 1,000 million. According to U.N. estimates, by time we reach the end of this century, there will be 10 billion of us.

Reuters

The planet is getting crowded, but there are still opportunities to make money, as these commuters in Hanoi can attest.

In the end, economics is just demographics, with some extra charts and equations. How many people there are in the world impacts fundamentally on what gets made, what gets consumed, and how much you have to pay for it.

So what will be the medium-term impact of the fast-rising numbers of people? Here are five big trends to watch.

One, the decline of the West will accelerate. Europe and the U.S. will account for a smaller and smaller percentage of global population. They may be richer overall, if they follow the right policies, but they won’t be richer compared to the rest of the world, and they probably won’t feel better off either. Their influence will decline, and so will their currencies, as well as their bond and stock markets. Is a world with 7 billion people in it going to use the money of a country with 312 million people as its reserve currency? It doesn’t sound very likely.

Two, Africa will rise and rise in significance. The fastest increases in population will be in sub-Saharan Africa, a region that most investors and companies have mistakenly written off as a basket case. Not so. That is where the fastest growth will be. Industrialization and a rising population are a formidable combination, a lesson that has been proved many times over the last three centuries. They produced rapid growth in the past, and will do again. Some of the biggest winners of the next three decades will be the African markets, and the companies and investors who get into those counties on the ground floor.

Three, the pressure on resources will grow and grow. You don’t have to be a fully-fledged Malthusian to realize natural resources will get scarcer. For three centuries now, technical progress and human ingenuity have allowed us to continually out-wit the prophets of ecological doom. We are good at finding new resources in unexpected places, and at making what we have go further. We’ll carry on being good at that. Even so, there are limits. The rise in population will mean there is less food, less water, less energy, and fewer minerals to go round. That can only mean one thing. Prices will go up. We’ll learn how to live with that — but the bull market in commodities will run and run.

Four, mobility will rise. The developed world will have lots of old people, with plenty of money, but not many young people to look after them. The developing world will have lots of young people, but few well-paid jobs. It isn’t hard to see the fix to that — bring the young people to the old people, and vice-versa. The rapidly aging populations of Europe and Japan, and to a lesser extent the U.S., will all have to overcome their reservations over large-scale immigration. Increasingly, retired people will go and live in the developing world, where the meagre returns on the savings and their devalued pensions, will buy them a lot more than in the countries where they grew up. The world will see mass migration on a 19th-century scale — when huge swathes of the European population moved to the U.S. And every industry — from airlines, to telecoms, to property — involved in that will do well.

Five, growth will get growing again. True, there are lots of challenges ahead. There is too much debt. The currency system is in turmoil. Inequality is rising. Stocks seem stuck in a permanent bear market. But, at the simplest level, more people means a lot more stuff being bought and sold. Which means when that 7 billionth person starts looking for a job sometime in the 2030s, the world economy will be a lot bigger than it is now, and probably richer overall as well.

The markets will rise and fall as they always do, But so long as the human race is still expanding, it will always end up growing somehow. Keep those big themes in mind and your portfolio will remain in decent shape, even if there will be some inevitable bumps along the way.

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